United States District Court, Northern District of Illinois, E.D
May 14, 1968
JERI J. BERMAN, PLAINTIFF,
ALBERT W. THOMSON, A.D. MARTIN, M.J. COEN, RALPH A.L. BOGAN, JR., EDWARD D. BOSHELL, FRANCIS C. WOOLARD, J. EARLE MAY, HERBERT F. KORHOLZ, AMERICAN GYPSUM COMPANY, A NEW MEXICO CORPORATION AND THE SUSQUEHANNA CORPORATION, A DELAWARE CORPORATION, DEFENDANTS, MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY, A MASSACHUSETTS CORPORATION, STATE MUTUAL LIFE ASSURANCE COMPANY OF AMERICA, A MASSACHUSETTS CORPORATION, AND THE FIRST NATIONAL BANK OF BOSTON, A NATIONAL BANKING ASSOCIATION, ADDITIONAL PARTY DEFENDANTS AS OF MARCH 15, 1966.
The opinion of the court was delivered by: Marovitz, District Judge.
Motion of Defendant First National Bank of Boston to Dismiss.
This is a derivative action, brought on behalf of the
Susquehanna Corporation, against certain of its directors and
others, to recover for the issuance of a proxy statement
alleged to be in violation of Section 14(a) of the Securities
Exchange Act of 1934 (15 U.S.C. § 78n), and Rule 14a-9
In essence, the plaintiff, a shareholder of Susquehanna, asks
this Court to set aside an Agreement of Merger under which
American Gypsum Company (Gypsum) would be merged into
Susquehanna, and to enjoin any action hereafter to be taken
pursuant to it, and to set aside any action taken under it
during the pendency of these proceedings. The gist of
plaintiff's aggrievement is contained
in Paragraph 26 of the complaint, where she avers:
"If the proposed merger is consummated, the
shareholders of SUSQUEHANNA will cease to be
shareholders of an almost debt free company with
excellent potential, and will become the victims
of this merger which will transform their company
into a debt burdened company with massive debt
charges and maturities as demonstrated by the
proxy statement. The gross book value of GYPSUM is
offset very largely by such debt burdens, which
will now be shifted to SUSQUEHANNA, endangering
the investment of every shareholder."
More specifically, as of June 30, 1965, Gypsum had assets of
$22,200,000. In addition, it had long term debt totaling
$12,517,000, of which $6,000,000 consisted of long-term
unsecured notes held by insurance companies, and $6,450,000
consisted of a collateral note from the First National Bank of
Boston (Boston Bank) which was secured by 430,000 shares of
Susquehanna stock owned by Gypsum.
The specific violations of Section 14 urged by plaintiff need
not be considered here, since they are not relevant to the
issue at bar, a motion to dismiss by defendant Boston Bank.
Plaintiff alleges, in the Third Amendment and Supplement to
the Complaint, that the above mentioned collateral note had a
maturity date of July 15, 1966, but that there was an oral
understanding between Gypsum and the Bank that if Gypsum were
merged into Susquehanna, the maturity date would be extended to
December 31, 1966. It is plaintiff's position that since the
pledged Susquehanna shares are "grossly insufficient" to pay
the note, assets of Susquehanna other than those attributable
to Gypsum will be used to pay all or a substantial part of said
note, unless this Court enters a restraining order.
Accordingly, the bank is added as a defendant for the purpose
of requiring it to account and repay to Susquehanna any of the
latter's assets received in payment of, or as collateral for,
any of Gypsum's obligations.
The Bank moves to dismiss on the grounds that: (1) it is not
subject to the jurisdiction of this Court under Sec. 27 of the
Exchange Act, 15 U.S.C. § 78aa; (2) although served with
process in Massachusetts, it is not subject to process from
this Court, and; (3) as a National Banking Association, it may
be sued only in Massachusetts, where its home office is
located, under the special venue provision of 12 U.S.C. § 94.
We believe that we are without jurisdiction as to the Boston
Bank and consequently they must be dismissed as party
Plaintiff concedes at page five of her memorandum that the
Bank was not a party to the alleged violation of Section 14.
"In the present action it is not charged that the
bank was a party to the fraud (in the statutory
sense of non-disclosure). No damages are sought
from it because of any violation of the Act by
itself * * *"
However, she urges that our jurisdiction over the Bank is
"ancillary" to the other charges under that section, and as
such enables her to make use of the nationwide service of
process provided in Section 27 of the Exchange Act. We
Plaintiff cites no authority for her position that the
doctrine of ancillary jurisdiction should apply to the Bank in
this action. Certainly no such authority is indicated in Note,
"The Ancillary Concept and the Federal Rules," 64 Harv.L.Rev.
968 (1951), cited by defendant. What plaintiff seeks to do is
to have us assert jurisdiction over a creditor of a corporate
debtor alleged to have violated the proxy rules. What limits on
this vague concept would plaintiff have us impose? Surely the
spectacle of a courtroom full of bona fide creditors suddenly
made party defendants to an Exchange Act proceeding, was
foremost in the thinking of Congress when it expressly
prohibited such an exercise of jurisdiction in Sec. 29(c) of
the Exchange Act, 15 U.S.C. § 78cc(c), by providing:
"(c) Nothing in this chapter shall be construed
(1) to affect the validity of any loan or
extension of credit (or any extension or renewal
thereof) made or of any lien created prior or
subsequent to June 6, 1934, unless at the time of
the making of such loan or extension of credit (or
extension or renewal thereof) or the creating of
such lien, the person making such loan or
extension of credit (or extension or renewal
thereof) or acquiring such lien shall have actual
knowledge of facts by reason of which the making
of such loan or extension of credit (or extension
or renewal thereof) or the acquisition of such
lien is a violation of the provisions of this
chapter or any rule or regulation thereunder, or
(2) to afford a defense to the collection of any
debt or obligation or the enforcement of any lien
by any person who shall have acquired such debt,
obligation, or lien in good faith for value and
without actual knowledge of the violation of any
provision of this chapter or any rule or
regulation thereunder affecting the legality of
such debt, obligation, or lien."
The loan in this case was made on or before June 30, 1965.
The alleged unlawful proxy statement was mailed on November 12,
1965. Thus the loan was made well in advance of the alleged
violation and could not have been made with "actual knowledge"
of the violation or the facts constituting it. By her
concession of the Bank's freedom from wrongdoing under the
Exchange Act, and failure to aver that the alleged "oral"
extension of the maturity date on the loan was in violation of
the Act, plaintiff is precluded from successfully making the
Bank a proper defendant.
Even assuming that we were willing to take ancillary
jurisdiction over the Bank, we believe that we would dismiss
for the other reasons asserted by defendant; namely that
nationwide service of process under Sec. 27 is unavailable to
bring in an ancillary defendant, and that venue is governed by
Sec. 94 of the National Banking Act, making this an
inappropriate forum to sue the Boston Bank. We believe it to be
unnecessary to elaborate further on those issues since we need
not make findings thereon, in view of our decision on the issue
Accordingly, we hereby dismiss the First National Bank of
Boston from this action.
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